Tuesday, November 24, 2009

Cutting Your Losses

My new article about "cutting your losses" has just appeared in the Ivey Business Journal. The article tries to offer some practical advice for how leaders can avoid the so-called "sunk cost trap" in their decision-making. Here is an excerpt:

In a highly volatile world, leaders cannot keep marching in the same direction simply because they have invested heavily in a particular course of action. Instead, leaders must react to changing conditions and be willing to shift direction accordingly, perhaps even to pivot one hundred eighty degrees if the situation warrants it. In a turbulent environment, leaders must gather feedback from multiple voices and assess progress against their original goals and objectives on a regular basis. As negative feedback emerges, or external conditions change, successful leaders learn and adapt. Unfortunately, far too many leaders stick to outdated strategies for far too long. Why do they fail to adapt? In part, many leaders do not want to “waste” the time and money that they have already spent. Thus, they keep plowing ahead despite all the changes taking place in their environment. Rather than cutting their losses and changing course, they “throw good money after bad.”

Persistence can be a valuable leadership quality, perhaps even more so in a volatile environment. Sometimes, we want our leaders to push through obstacles; no one likes a quitter, as they say. However, we must be concerned if someone ignores all the advice and evidence to the contrary and continues to throw good money after bad. We certainly should be wary if an individual or a team appears to have a track record indicating a reluctance to cut their losses when projects go south. In sum, in a volatile world, perhaps we must question the extent to which our organizational cultures emphasize the value of perseverance. How much value do we destroy by making people feel as though reversing direction and cutting losses are things about which we should be ashamed? Should we not strive to create an organizational climate that makes admitting and learning from mistakes as valued as persistence and perseverance?

2 comments:

One thing I've found is that if you've made one important decision where you came face-to-face with sunk costs [and ignored them in the final decision], it becomes so much easier to do so in the future.

It also helps to have people who didn't sink the costs themselves to do an evaluation of the situation going forward.

Michael Roberto

The Great Courses

About Me

I am the Trustee Professor of Management at Bryant University in Smithfield, RI. I joined the faculty after serving for six years on the faculty at Harvard Business School.

My research, teaching, and consulting focuses on leadership, with a particular emphasis on decision-making and teams. I have published two books based upon my research: Why Great Leaders Don't Take Yes For An Answer (2nd edition to be released in May 2013), and Know What You Don't Know (2009).